In the new issue of Regulation, economist Pierre Lemieux argues that the recent oil price decline is at least partly the result of increased supply from the extraction of shale oil. The increased supply allows the economy to produce more goods, which benefits some people, if not all of them. Thus, contrary to some commentary in the press, cheaper oil prices cannot harm the economy as a whole.

Two long wars, chronic deficits, the financial crisis, the costly drug war, the growth of executive power under Presidents Bush and Obama, and the revelations about NSA abuses, have given rise to a growing libertarian movement in our country – with a greater focus on individual liberty and less government power. David Boaz’s newly released The Libertarian Mind is a comprehensive guide to the history, philosophy, and growth of the libertarian movement, with incisive analyses of today’s most pressing issues and policies.

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Tag: recession

A new Wall Street Journal/NBC News poll would seem to say yes. In a story over the weekend under the headline, “Americans Sour on Trade,” the Journal reports:

more than half of those surveyed, 53%, said free-trade agreements have hurt the U.S. That is up from 46% three years ago and 32% in 1999.

One plausible explanation for the sour mood toward trade is the business cycle. 1999 was near the peak of the long boom of the 1990s, when Americans were feeling good about just about everything. Even three years ago, the stock market was at a record high and unemployment was below 5 percent. In this light, trade is another casualty of the lingering recession, not a cause as many trade critics want to argue.

“Outsourcing” was a major source of anxiety in the poll. Americans overwhelming believe outsourcing of production and manufacturing work to other countries is a reason why the economy is struggling and new jobs are not being created. This collective attitude is more reflective of the complaints people hear in the media than of any hard reality on the ground.

As I document in my 2009 Cato book, Mad about Trade, only about 3 percent of job displacement in the United States can be blamed on trade. (See pp. 31-33.) For every one person in the unemployment line because of imports or outsourcing, there are 30 people who have been displaced from their jobs by technology, domestic competition, changing consumer tastes, or the general business cycle.

Despite the popular worries, outsourcing is more likely to attract business to the United States than send it overseas. Year after year, more direct manufacturing investment flows into the United States than out to other countries. Year after year, Americans sell more “business and professional services” to customers abroad than they buy.

The facts are on the side of expanding the freedom of Americans to trade and invest with people in other countries. What is lacking are political leaders in Washington who will stand up for the broader national interest of our country against the special interests who are exploiting anxiety about the economy to trash trade.

The Government Accountability Office released Congressional testimony this week looking at Temporary Assistance for Needy Families. TANF, which replaced unrestricted welfare in 1996, has reduced welfare rolls and encouraged recipients to obtain work. Unfortunately, TANF’s goals have been undermined.

The GAO notes that “work participation rates … do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF adults in work activities.”

States are required to have at least 50 percent of eligible TANF recipients from single parent families participating in work activities. However, states are given various credits and exemptions that significantly reduce the number of recipients required to work. As a result, only about 30 percent of TANF recipients engage in “work activities,” which is often liberally defined. (This has been the case before and during the recession.)

Moreover, while TANF has successfully reduced the budgetary cost of cash-welfare, overall federal spending on anti-poverty programs has increased dramatically. According to a chart from Brian Riedl, anti-poverty spending has increased an inflation-adjusted 89 percent over the present decade:

I previously discussed how TANF enrollment has dropped since its passage in 1996 while food stamp enrollment has greatly increased. A food stamp user interviewed by the New York Times indicates one reason for the trend:

‘It used to be easier to go on cash assistance,’ she said as she left a food stamp office in Brooklyn this month. ‘You didn’t have to go to work, you didn’t have to report every day to an office and sign in and sign out. Now, if you don’t go to those group job meetings in the mornings, they shut down your whole welfare case. So that’s why I just get food stamps.’

Not surprisingly, the cost of the food stamps program has gone through the roof:

The desirability of federal anti-poverty programs in the midst of difficult economic times is a sensitive topic. However, with so many Americans currently in need of assistance, now is actually a good time to discuss the role of government in taking care of the less fortunate. As a Cato essay on welfare and Temporary Assistance for Needy Families argues, the federal government isn’t the best option.

As an economist I am the first to admit that sometimes the methods and practices of economics can end up creating confusion rather than understanding. The National Bureau of Economic Research’s (NBER) recent announcement that the recession ended in June 2009 is one such example.

At the heart of this confusion is a difference in how the public sees a recession and how NBER defines it. Most importantly, NBER views recessions as contractions. Simply, “Is the economy growing or not?” NBER uses that framework to then date business cycles from their peak to their trough. For this reason, NBER will often date the beginning of a recession during a time when the economy feels strong (at its peak) and date the end of a recession when it feels weak (when it’s at the bottom).

Since this method seems at odds with how the public views the economy, why do economists use it? Quite simply, it is a lot easier to spot, and agree on, turning points in the economy than it is to agree on when growth moves from weak to moderate to strong.

OK, enough on definitions. Did we actually hit bottom in Summer 2009? Looking at a variety of economic measures, I think it’s clear we hit bottom earlier–more like Spring 2009. Again, I must emphasize: Hitting bottom is not the same thing as “everything is fine” - just ask anyone who’s personally hit bottom. Just two examples of why I believe the contraction ended in early 2009; first: consumption, as one can see from the chart, actually hit bottom hear the end of 2008.

One of the defining characteristics of the current recession has been continued weakness in the labor market. I would go as far as to say there has almost been a disconnect of the labor market from the general economy. All that said, looking at the trend in layoffs and discharges indicates that separations from the labor force peaked near the end of 2008. The graph below also illustrates why some are worried about a double-dip, as layoffs spiked again in the middle of 2010, although most of that is driven by the 2010 Census hires.

The point to all this is not to argue that the economy isn’t weak. It obviously still is. However, the economy has been growing, for at least a year, and under many measures, longer. Interestingly enough, most measures of the economy hit bottom before a dime of stimulus money was spent. The above charts are from the Federal Reserve of St. Louis FRED website. Don’t take my word on these two charts. Look at lots of other measures. Not all, but most other measures seem to tell the same story.

Dana Milbank of the Washington Postwrote this weekend that critics of Keynesianism are somewhat akin to those who believe the earth is flat. He specifically cites the presumably malignant influence of the Cato Institute.

Keynes was right, and in this case it’s probably for the better: Keynes didn’t live to see the Republicans of 2010 portray him as some sort of Marxist revolutionary. …These men get their economic firepower from conservative think tanks such as the Cato Institute… What’s with the hate for Maynard? Perhaps these Republicans don’t realize that some of their tax-cut proposals are as “Keynesian” as Obama’s program. There’s a fierce dispute about how best to respond to the economic crisis – Tax cuts? Deficit spending? Monetary intervention? – but the argument is largely premised on the Keynesian view that government should somehow boost demand in a recession. …With so much of Keynesian theory universally embraced, Republican denunciation of him has a flat-earth feel to it. …There is an alternative to such “Keynesian experiments,” however. The government could do nothing, and let the human misery continue. By rejecting the “Keynesian playbook,” this is what Republicans are really proposing.

Milbank makes some good points, particularly when noting the hypocrisy of Republicans. Bush’s 2001 tax cuts were largely Keynesian in their design, which is one of the reasons why the economy was sluggish until the supply-side tax cuts were implemented in 2003. Bush pushed through another Keynesian package in 2008, and many GOPers on Capitol Hill often erroneously use Keynesian logic even when talking about good policies such as lower marginal tax rates.

But the thrust of Milbank’s column is wrong. He is wrong in claiming that Keynesian economics works, and he is wrong is claming that it is the only option. Regarding the first point, there is no successful example of Keynesian economics. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. It didn’t work for Bush in 2001 or 2008, and it didn’t work for Obama. The reason, as explained in this video, is that Keynesian economics seeks to transform saving into consumption. But a recession or depression exists when national income is falling. Shifting how some of that income is used does not solve the problem.

This is why free market policies are the best response to an economic downturn. Lower marginal tax rates. Reductions in the burden of government spending. Eliminating needless regulations and red tape. Getting rid of trade barriers. These are the policies that work when the economy is weak. But they’re also desirable policies when the economy is strong. In other words, there is no magic formula for dealing with a downturn. But there are policies that improve the economy’s performance, regardless of short-term economic conditions. Equally important, supporters of economic liberalization also point out that misguided government policies (especially bad monetary policy by the Federal Reserve) almost always are responsible for downturns. And wouldn’t it be better to adopt reforms that prevent downturns rather than engage in futile stimulus schemes once downturns begin?

None of this means that Keynes was a bad economist. Indeed, it’s very important to draw a distinction between Keynes, who was wrong on a couple of things, and today’s Keynesians, who are wrong about almost everything. Keynes, for instance, was an early proponent of the Laffer Curve, writing that, “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

Keynes also seemed to understand the importance of limiting the size of government. He wrote that, “25 percent taxation is about the limit of what is easily borne.” It’s not clear whether he was referring to marginal tax rates or the tax burden as a share of economic output, but in either case it obviously implies an upper limit to the size of government (especially since he did not believe in permanent deficits).

If modern Keynesians had the same insights, government policy today would not be nearly as destructive.

In the 2006 and 2008 election cycles, Republican candidates for Congress tried to save their bacon by running against immigration. In 2010, according to the Wall Street Journal this morning, a number of Democrats are trying to save their seats by running against trade. I predict the Democratic tactic will be as fruitless as the Republican effort before it.

Democratic incumbents have been running TV ads accusing their Republican challengers of favoring trade agreements, outsourcing, and tax breaks for U.S. companies that invest abroad. The charges are wrong on substance, as I address at length in my 2009 Cato book Mad about Trade: Why Main Street America Should Embrace Globalization, but running against trade has not proven to be a vote getter, either.

It is difficult to find a presidential or congressional election anywhere that has turned on trade. While most voters have an opinion on trade, the issue tends to rank down the list of top concerns, far behind the economy, jobs, and, in this election cycle, government spending and debt.

Demonizing trade is an especially odd campaign tactic in 2010. The recession of 2008-09 was not caused by trade, but by the bursting of the housing bubble. As the economy slowly recovers, trade has been one of the bright spots, with a healthy increase in exports fueling a revival of the closely watched manufacturing sector, as my Cato colleague Dan Ikenson blogged a few days ago.

Democrats running against trade should remember that the “Clinton economy” of the 1990s that they often speak nostalgically of restoring was built in significant part on the passage of major trade agreements and a robust expansion of trade.

With the exception of the recession of 08-09, when all U.S. economic sectors took a hit, U.S. manufacturing has been breaking its own record, year after year, with respect to output, value-added, profits, returns on investment, exports, and imports. U.S. factories are the world’s most prolific, accounting for 21.4% of global manufacturing value added in 2008 (China accounted for 13.4%).

But I bring the AP headline to your attention for one reason: so that you can judge for yourself who has any credibility on Capitol Hill, within the executive branch, in the media, among organized labor, in industry, in the think tank world, and within the international trade bar, as Nancy Pelosi tries to stuff a ruinous anti-China trade bill down our throats in the name of supporting our floundering manufacturing base. Look for the columns, the op-eds, the press releases, and the floor statements between next week and November.

Who among them will continue to cite our suffering manufacturing sector as the justification for protectionism? They should never again have any credibility.